As pointed out by Lenore Ealy in her recent blog, there is an interesting connection between a couple of articles in the July 10, 2012 issue of The Freeman. One article by Peter Lewin was a critique of Keynesian stimulus/job creation programs from the viewpoint of Austrian capital theory. The creation of capital and enterprises is a roundabout time-consuming process, and cannot be a quick response to a government stimulus program. The other article by Sandy Ikeda makes a similar point with respect to the bourgeois paternalism of government programs to remake troubled communities since “no government can create what can only emerge spontaneously. That includes genuine communities, warts and all, instead of unsustainable projects and ‘Disneyland neighborhoods.’”
These themes are essentially the same as the critique of socially engineered development projects (see my Helping book). All sustainable processes of social construction (communities as well as enterprises) depend on the exercise of people’s autonomy and internal motivation, neither of which can be imposed from the outside—like pushing on a string. Thus the attempts by those in power to “generate” these results (e.g., War on Poverty) lead to pseudo-results, Disneyland neighborhoods, government-promoted white elephant factories built to “develop” a region, and Jeff Sachs’ millennium (or rather Potemkin) villages in Africa, usually designed to deliver “measurable results” often in sync with political or bureaucratic funding cycles.
All this is fine, but my problem with the Austrian/libertarian theory is (as usual here, here, and here) its failure to follow through with its own excellent principles when it is politically or ideologically inconvenient. Where is the analysis of what happens to genuine entrepreneurship and enterprise development in the massive economic processes over the last century brought about by the absentee ownership of companies on the stock market?
After correctly seeing the disconnect between government Keynesian stimuli and the market process of enterprise development, the Austrians seem to have little to say about how the Wall-Streetization of the major companies has promoted the obsession with the quarterly manipulation of earnings and stock prices and corporate buying and selling of subsidiaries—all rather disconnected from, if not antithetical to, genuine entrepreneurship and enterprise development. Austrians laser in on the inanities of politicians (who are not tasked with enterprise development) geared to a four-year political cycle, but apparently find it rather inconvenient to take on elite corporate management whose manipulations are geared to a quarterly cycle! Some Austrians even seem to glorify, rather than criticize, the transition away from enterprise development by redefining “entrepreneurship” in terms of quickly spotting arbitrage opportunities (Kirzner), e.g., the stock-trader as “entrepreneur,” which is actually quite a different skill than building a company.
Perhaps I am just not widely enough read in the Austrian literature to know where it focuses in on and criticizes the almost century-old effects of absentee ownership and the stock-market-sponsored financialization of the commanding heights of the corporate economy—and on its long-term deleterious effects on the American economy.
The irony in all this is that there was one prominent economist who, above all others, did emphasize how genuine enterprise was undercut by the short-termism and financial focus of a stock-marketized economy, and his name was John Maynard Keynes.
“The divorce between ownership and the real responsibility of management is serious within a country when, as a result of joint-stock enterprise, ownership is broken up between innumerable individuals who buy their interest today and sell it tomorrow and lack altogether both knowledge and responsibility towards what they momentarily own.” [Keynes, John Maynard 1933. National Self-Sufficiency. In The Collected Writings of John Maynard Keynes. Donald Moggeridge ed., London: Cambridge University Press, 235-6]
“Decisions to invest in private business of the old-fashioned type [i.e., direct investment, not ‘investment’ on the stock market] were, however, decisions largely irrevocable, not only for the community as a whole, but also for the individual. With the separation between ownership and management which prevails to-day and with the development of organised investment markets, a new factor of great importance has entered in, which sometimes facilitates investment but sometimes adds greatly to the instability of the system.” [Keynes, John Maynard 1936. The General Theory of Employment, Interest, and Money. New York: Harcourt, Brace & World., 150-1]
For instance, Keynes was much concerned with the adverse effects of the stock exchange on real investment and enterprise. Real investment in productive enterprise should be stable, and the management of enterprise requires a long term commitment in order for the application of “intelligence to defeat the forces of time and ignorance of the future.…” [Ibid., 157] But when investment is securitized as a marketable asset on the stock exchange, then it
“is as though a farmer, having tapped his barometer after breakfast, could decide to remove his capital from the farming business between 10 and 11 in the morning and reconsider whether he should return to it later in the week.” [Ibid., 151]
“The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only.” [Ibid., 160]
The stock exchange panders to the “fetish of liquidity” and thus continually undermines the bonds of long-term commitment that are so important to problem-solving and productive enterprise. Keynes, of course, wrote this long before today’s ultra-short-termism with quarterly reports, stock options, constant churning of M&A activity, and computerized trading.
The point is that Austrians seem to have trouble finding their voice to distinguish the day-trading/arbitrage activities (e.g., Lewin’s “entrepreneurs’ expectations of profitably making new capital combinations, only some of which would, in the event, prove to be profitable”) from the entrepreneurial process of enterprise creation. Thus the Austrians are not in a very good position to be lecturing Keynes on the topic of enterprise development.
This theme is developed at greater length in my blog: Is Wall-Street Capitalism really “the Model”?